Though employee fraud and dishonesty is rarely foreseeable, it is always possible. In order to protect your United State Department of Agriculture (USDA) – Rural Development (RD) property, you will want to understand what fidelity bonds are and how you should be calculating yours.
- Fidelity bonds protect RD properties from monetary loss
- The fidelity bond coverage calculation was clarified with the updated handbook
- Fidelity bond deductible required amounts are presented by the Agency
- We are friendly auditors who are here to serve
What is a fidelity bond?
Fidelity bonds provide coverage to the insured when there is a property or monetary loss directly correlated to dishonest acts of bonded employees. Bonded employees will be listed on the coverage by their position or name, to ensure clarity if a loss were to occur. A fidelity bond may also be referred to as Blanket Crime Coverage, Employee Dishonesty, Employee Thief, or Fidelity Coverage.
Why is a fidelity bond required?
A fidelity bond is important because it provides coverage on those who have access to company project assets, decreasing the risk of significant loss. Without fidelity bond coverage, a property will be responsible for the entirety of any loss that occurs. As found in the USDA Rural Development Handbook, under Chapter 4, a fidelity bond is a compliance requirement.
Is your fidelity bond coverage calculated correctly?
The fidelity bond insurance policy should include an insured agreement that employee dishonesty will be covered. The minimum monetary coverage required is $10,000. However, fidelity coverage is often over that minimum when calculated correctly.
The USDA Rural Development Handbook offers guidance in Chapter 3 on coverage requirements. To meet requirements, you will want to multiply your exposure index by your coverage factor.
To determine your exposure index: Exposure index is 25% of the SUM of annual cash receipts (rents, cash subsidy, security deposits and interest, etc.) and cash (cash, carryover, reserves, CDs, tax, and insurance escrows, etc.). Be certain to round to the next higher $1,000.
To determine your coverage: Coverage is the exposure index multiplied by the coverage factor. The coverage factor is taken from the coverage chart which is shown below in Exhibit 3-5. Be certain to round to the next higher $1,000.
Below is an example to help provide a basis for what your calculations may look like:
Annual Cash Receipts
Rental subsidy 120,000
Tenant charges 13,000
Laundry revenue 6,000
Misc. revenue 1,000
Total annual revenue $350,000
Cash Account Balances
Tenant security deposits 7,000
Tax and insurance 3,000
Total cash account balance $150,000
Total of annual revenue and cash $500,000
Exposure index x 25%
Calculated exposure index amount $125,000
Coverage factor x .28
Required coverage $ 35,000
Click here for calculation example in excel format that you can use.
Deductibles and Fidelity Coverage
Following your fidelity coverage calculation, you will want to utilize Rural Development’s guidance on acceptable deductible levels. Deductibles are created to provide flexibility in determining what the project can pay from their own assets at a time of loss. Exhibit 3-6 in the chart below shows deductible levels that meet Agency requirements. Fidelity coverage may need to be adjusted each year as borrowers review and adjust.
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Calculating the appropriate amount of fidelity coverage and deductibles can be a tricky task, so it helps to have the formulas with examples accessible. While these calculations can be done independently, our team is always available for any assistance or questions you may have. Please give us a call or contact us through our website to start a conversation! We see beyond numbers, we see relationships.